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The smartphone market, forecast to reach 700 million units by 2015, is expected to switch en masse to Bluetooth low energy technology, enabling these phones to become a hub for a multitude of other wireless devices.

Bluetooth is a proprietary open wireless technology standard for exchanging data over short distances (using short wavelength radio transmissions in the ISM band from 2400-2480 MHz) from fixed and mobile devices, creating personal area networks (PANs) with high levels of security. It was originally conceived as a wireless alternative to RS-232 data cables (An RS-232 port was once a standard feature of a PC for connections to modems, printers, mice, data storage, un-interruptible power supplies, and other peripheral devices.)Bluetooth can connect several devices, overcoming problems of synchronization.

Uses

Bluetooth is a standard wire-replacement communications protocol primarily designed for low power consumption, with a short range (power-class-dependent, but effective ranges vary in practice; see table below) based on low-cost transceiver microchips in each device Because the devices use a radio (broadcast) communications system, they do not have to be in visual line of sight of each other, however a quasi optical wireless path must be viable.
Class
Maximum permitted power
Range
(m)
(mW)
(dBm)
Class 1
100
20
~100
Class 2
2.5
4
~10
Class 3
1
0
~5
The effective range varies due to propagation conditions, material coverage, production sample variations, antenna configurations and battery conditions. In most cases the effective range of class 2 devices is extended if they connect to a class 1 transceiver, compared to a pure class 2 network. This is accomplished by the higher sensitivity and transmission power of Class 1 devices
Version
Data rate
Maximum application throughput
Version 1.2
1 Mbit/s
0.7 Mbit/s
Version 2.0 + EDR
3 Mbit/s
2.1 Mbit/s

Communication and connection

A master Bluetooth device can communicate with a maximum of seven devices in a piconet (an ad-hoc computer network using Bluetooth technology), though not all devices support this limit. The devices can switch roles, by agreement, and the slave can become the master (for example, a headset initiating a connection to a phone will necessarily begin as master, as initiator of the connection; but may subsequently prefer to be slave).

Video Explaining how Bluetooth works:
http://videos.howstuffworks.com/techstuff/23013-how-bluetooth-works-video.htm